Selecting the Perfect Financial Reporting Solution for Your Business: Audit vs. Review Engagement

Understanding the nuances of financial reporting can be a daunting task for business owners. We often hear terms like "audit," "review engagement," and "compilation engagement," but what do they really mean, and how do they differ from one another? In this blog post, we'll break down these financial reporting options to help you make informed decisions about the best choice for your business.

 

Let's start with the audit. When you hear the word "audit," you might think of it as a potential source of stress or worry. However, in the business world, an audit is a positive process. It involves an external company, typically a Chartered Professional Accountant or Certified Public Accountant (CPA) firm, coming in to conduct a comprehensive examination of your financial processes and systems. The primary objective is to verify that adequate controls are in place to ensure the accuracy and reliability of the reported financial numbers.

 

Audits are not common for all businesses, and, in fact, they are usually required only by banks, especially if your business has significant borrowing. Audits are the most expensive and thorough option among these financial reporting choices. They provide the highest level of assurance that your financial information is accurate.

 

The review engagement is a step down from the audit in terms of both cost and intensity. It is a more common choice, especially for businesses with a borrowing relationship with banks. In situations where your level of borrowing exceeds a certain threshold, banks may request a review engagement.

 

In a review engagement, financial statements undergo a more detailed analytical review, including inquiries and discussions about how the numbers are derived. However, it falls short of the depth and thoroughness of an audit. The financial statements generated in a review engagement closely resemble those of an audit, with some variations in the reporting letter.

 

The compilation engagement is the most straightforward option for financial statement preparation. It's a simplified approach, and in many cases, it may not include note disclosures. Unlike the more detailed financial statements of audits and review engagements, the financial statements produced in a compilation engagement are more streamlined.

 

However, at some firms, including ours, a few essential notes may still be included. These notes typically cover financial policies, debt, and capital assets, as these are significant items affecting the financial statements. Although the level of detail in compilation engagement financial statements is less than in review engagements, it might be sufficient for businesses that don't require the higher level of scrutiny.

 

The financial reporting option you choose should align with your business's specific needs and priorities. If you are looking for the most robust and detailed financial statements, a review engagement would be the ideal choice. On the other hand, if you don't require extensive disclosure or you're seeking a more simplified approach, a compilation engagement may be more appropriate.

 

When making your decision, consider factors like the level of assurance you need, your relationship with lenders, and the potential cost implications. Whichever option you choose, rest assured that each one serves a specific purpose and can provide valuable insights into your business's financial health.